FTX falls – what’s next?

November 18, 2022 Stan

Terra Luna. 3AC. Celsius. Voyager.

In a year full of devastating events, we experienced one this week that has topped it all.

I’m going to bring you up to speed on the FTX saga, and share some of my takes on it.

In Today’s Email, We’ll be Covering:

FTX: An Empire has fallen.
What Now? A few of my thoughts.
Go Deeper: Additional resources if you want to research.
DeFi Bites: Other news around DeFi.

Let’s Dive in!

If this newsletter looks different, it’s because we gave it a facelift to make it easier to read. Let me know what you think by replying to this email!

📈THE MARKETS

U.S. CPI data has released. In October, it’s at 7.7% compared to last year. This is lower than what was forecasted.

People are hoping that this gives the Fed the space to slow down the steep interest rate hakes.

The Crypto markets has responded well to the numbers considering the disaster this week.

Those who do not manage their risk will have the market manage it for them – Zhu Su

🪦 FTX: THE FALLEN EMPIRE

Sam Bankman Fried.

The golden boy of the industry.

He graced the cover of Forbes. Inked endorsement deals with some of the biggest sports stars in the world. Shook hands with Politicians.

His $16b net worth went down by 94% within a few days..

Here’s a high level overview of what has happened in the past few days.

The Key Figures:

Sam Bankman Fried (SBF). The founder of FTX. He was one of the youngest billionaires in history.
Changpeng Zhao (CZ). The founder of Binance. (The largest Crypto exchange in the world)
FTX. The 3rd or 4th largest exchange in the world. It was valued at $32b a few months ago.
Alameda Research: his trading firm. FTX and Alameda are supposed to be separate companies.

Please note that this is an ongoing story. We’ve done the best we can to be as objective as possible, but no one has all the facts yet.

The Spark

On November 2, Coindesk released an article on Alameda’s balance sheet. It claimed that a high percentage ($5.8 billion of the reported $14.6 billion) of Alameda’s assets was $FTT.

$FTT is an exchange token of the FTX network – people loved it because it gave a discount on trading fees. I

The problem? FTX and Alameda are supposed to be separate entities.

They were using it as collateral to take out billions in USD loans.

$FTT was relatively illiquid since FTX and Alameda owned most of the tokens in circulation. So if anyone were to massively sell $FTT tokens, it could tank the price.

The Fire

Alameda’s CEO, Caroline, tweets out that the CoinDesk story isn’t the full picture.

So, Alameda has more assets. They don’t have holes in the balance sheet.

Everything should be fine. Right?

Enter Changpeng Zhao, aka CZ.

CZ just announced that he’s going to dump $2.1B worth of FTT that they acquired from being an early investor in FTX.

Note: There’s a lot of speculation into why CZ decided to make that move. CZ did tweet “But we won’t support people who lobby against other industry players behind their backs.”

SBF has been proactively lobbying for more Crypto regulation. We don’t know what kind of 5D chess moves CZ was intentionally doing.

Alameda’s CEO offers to OTC buy Binance’s $FTT stack at the rate of $22. CZ is doubtful. He wants to liquidate the holdings.

The Wildfire

This fueled the FUD narratives around FTX’s insolvency. The FTT price starts dropping. Users start withdrawing funds from FTX.

Alameda starts selling its assets to meet FTX’s liquidity needs. CT sees this. FUD intensifies.

Things are getting a little too real for SBF.

He writes a thread defending FTX. Unfortunately, it has now been deleted. This wasn’t the first time CT heard “steady lads.”

The general consensus was that it is better to be safe than sorry. Users kept withdrawing.

The bank run is here – over $5b was withdrawn from FTX on Sunday.

A few days later, the price of FTT tanks.

The Ashes

Sam was silent for a day.

And then…

Sam bent the knee – he would sell FTX to Binance.

Everyone had a moment of relief.

Keep in mind though….this was pending due diligence. At this point, no one knew how bad things were.

Within 24 hours…

Binance pulled out.

There are a few theories about this:

1) Binance had no intention to buy. They want to take a peak under the hood.

2) The numbers were THAT bad. Between the numbers and regulation heat, they decided to back off.

There are rumors that FTX is $8 billion dollars in the hole. Billion! No one is big enough to bail FTX out.

And then a few minutes ago, SBF apologies.

Claims that FTX US users are fine. It’s FTX International that’s being affected.
He wishes he communicated better.
They’re doing everything possible to raise liquidity.
Alameda Research is winding down.
He sends shades at CZ

Whew!

I’m exhausted from writing this. There’s still a lot more other stuff, but this should catch you all up to speed.

⚔️ EDGY’S THOUGHTS

I’m frustrated beyond belief.

Let’s get one thing clear…this isn’t DeFi.

So many of the blow ups this year were caused by shady and corrupt CeFi players. There was a lot of fraud behind the scenes that we haven’t completely uncovered yet.

They were playing a game where they had every advantage imaginable. They were playing on God mode and still lost.

“Pigs get fat, hogs get slaughtered.”

It’s going to take a long time for us to understand what happened behind the scenes, and to process everything.

This event is going to set Crypto back by several years.

First thing’s first, protect yourself.

Take all funds off of ALL exchanges. Transfer them to a wallet secured by a hardware wallet (I use Ledger Nanos).
If you’re using FTX, take screenshots. You may need them for legal action in the future, or for tax reasons.

Is this the worst Crypto disaster of all time? Well, it’s up there. Let’s not turn this into a suffering contest.

I know a lot of sophisticated Crypto traders who are ruined by this because their funds are in FTX.

What makes this so bad is that no one saw this coming. People were warned about Celsius and Terra Luna for months.

FTX? There wasn’t a Canary in a coal mine. There were no indicators something was wrong.

What’s hard to figure out now is the Contagion effects.

Whenever there’s a big event, think about the 2nd and 3rd order consequences.

A few examples:

The Solana Ecosystem is taking a beating. The total value locked in Solana has gone down by ~55% in the past 7 days.
Regulations. This is a gift from the gods to anyone pushing for more regulation and scrutiny.
What has Alameda and FTX ventures invested in? They’re selling off everything. I don’t think they’re bailing out BlockFi and Voyager anymore
Who has lent money to Alameda?
Firms that invested in FTX and how this affects them.
It goes on and on and on.

“Edgy, were you affected by this? How are you playing this?”

I’m not too affected by this personally. I never used FTX as an exchange, and don’t have any exposure to the Solana ecosystem.

There’s seems to be some pegging issues now with Tron’s USDD and Tether. Most of my stables are in USDC, BUSD, and DAI at the moment.

When craziness happens, I prefer to sit on the sidelines and watch.

The markets are green today, but it’s going to take months for the full dominoes to fall.

Don’t try to catch a falling knife.

📖 GO DEEPER

Want to read more?

Multichain Capital had exposure to the Solana ecosystem and FTX. Here’s the letter Multicoin Capital sent to LPs.

Sequoia Capital also sent a letter to their LPs.

Scope Protocol claims SBF and Alameda Capital have been sharing the same funding and exchange accounts for a long time. They share evidence in this thread.

Where did the 8 billion go? According to Block, SBF used $4 billion to prop up his trading company Alameda Research.

The slack message sent by SBF in FTX slack was leaked. He claims that Binance never intended to go through with the deal.

🍿 DEFI BITES

Do Kwon and Martin Shkreli got together on UpOnly. “Hey Do, I just want to let you know, jail is not that bad,” Shkreli, who was a convict, told Do Kwon, who’s on the run.

JP Morgan completed its first transaction on a public blockchain. Is this the beginning of the great Defi partition? The one between regulated DeFi and self-regulated DeFi.

Vitalik doesn’t want DeFi to integrate with TradFi. According to him, DeFi needs to mature, and the community should not be pursuing institutional capital at full speed.

Ether turned ultrasound yesterday. The spike in network activity resulted in nearly 3000 ETH being burned.

Instagram is letting users create and trade NFTs from their app. They’ll be using Polygon and Arweave in the backend. This is a big leap for crypto-adoption.

MakerDAO’s Endgame plan is under fire. While the proposal introduces radical changes to the DAO, it only had a 15% turnout. And out of that 15%, 74% was under the economic influence of a single guy, Rune Christenson.

The US DoJ seized $1 billion worth of BTC from the Silk Road Heist. The US government is now one of the largest Bitcoin holders.

SEC issues subpoena to influencers promoting scams such as HEX, Pulsechain, and PulseX. This indicates that SEC is actively investigating these chains, and influencers shilling these scams might face consequences.